Sinopec expects much smaller government subsidy

Sinopec, the country’s largest oil refiner, said it believed it would not receive a large subsidy this year from the government, reported Friday’s Shanghai Securities News, a newspaper run by Xinhua News Agency.

Sinopec received government subsidies of 10 billion yuan (US$1.36 billion) and five billion yuan respectively in 2005 and 2006 to cover losses incurred in running its refineries. The losses are caused in the most part by the yawning gap between domestic oil product price and the rising international crude price.

Official figures showed that about 70 percent of the crude oil consumed by the company was imported, and its refinery capabilities accounted for more than 52 percent of the country’s total in 2006.

PetroChina, the country’s biggest oil producer and second largest refiner, whose refining capabilities accounted for 37 percent of the nation’s total in 2006, received no such subsidies in the past two years as its businesses were composed of oil and gas exploration, development and production, pipeline construction, crude oil and oil products trading besides refining.

There was a report in Thursday’s China Securities Journal that Sinopec and PetroChina were considering lobbying the government to grant them subsidies because of losses from their oil products importation and refining operations.

Sources from Sinopec told Shanghai Securities News that the government would base its approval of subsidies not on the performance of one sector of the company’s businesses but would take the company’s overall operation into consideration and even if the government would grant a subsidy, the amount would not exceed the five billion yuan of 2006.

"Sinopec’s whole year loss from its refining business might stand around eight billion yuan, less than the 10 billion yuan loss of last year," predicted Qiu Xiaofeng, an analyst with China Merchants Securities.

When contacted, Sinopec’s information office declined to comment as no one senior enough was available.

Data from the China Petroleum and Chemical Industry Association revealed that in the first three quarters of this year, the total output value of the industry reached 3.82 trillion yuan, up 20.2 percent, with around 60 percent of prices of oil and chemical products on the rise.

Experts held that as the country’s largest chemical product manufacturer and distributor, Sinopec benefited from the booming growth in industry.

In China, oil prices are controlled by the government. The two company bottom lines were hit hard this year by the rising cost of international crude oil, but they were unable to raise prices to protect themselves.

The government raised the price of gasoline from 5,480 to 5,980 yuan and diesel oil price from 5,020 yuan to 5,520 yuan per ton on November 1 in face of the surging domestic needs and international oil price.

Sinopec has imported 388,000 tons of oil products since the beginning of September and plans to import a further 423,000 tonnes of diesel oil this December to ease surging domestic oil product demand.

The two oil giants have also ordered their refineries to run at full capacity and are trying to draw on stockpiles as much as possible.

Industry observers held that the country may further reduce or cancel the current five percent import tariffs for gasoline and six percent import tax for diesel oil.

Prof. Zha Daojiong of Peking University said it was difficult for him to predict whether the government would cut or cancel gasoline and diesel oil import tax soon, but he held that it was possible because such a move was reasonable at such a time.

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